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Press release on the Monetary Council’s meeting of 25 September 2006

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25 September 2006

1.    At its meeting on 25 September 2006, the Monetary Council considered the latest economic and financial developments and voted to increase the central bank base rate by 50 basis points from 7.25% to 7.75%, with effect from 26 September 2006.

In the current environment of rising inflation, it is important for the Monetary Council to stress that meeting the 3% medium-term inflation target is its primary objective over the horizon relevant for policy. A crucial condition for this is to improve the general government balance and Hungary’s external equilibrium. Economic data which have become available over the past few weeks reinforce the Council’s view in August that there might be a significant probability of inflation rising above the target in the absence of further monetary policy tightening.

The most recent data are evidence of increased inflationary pressure. The rise in inflation during the summer months appears to have been very broadly based, and cannot be linked to one-off shocks. The weaker forint exchange rate, the sudden rise in unprocessed food prices early in the year and the increase in inflation expectations may have contributed to a pick-up in inflation of industrial goods, processed foods and market services respectively. Looking ahead, the recent fall in the world market price of crude oil, if it continues, may have a positive effect. The decline in oil prices may not only put downward pressure on inflation directly through lower fuel prices, but it may also reduce the rate of further rises in administered energy prices.

In taking its decision, the Monetary Council also took into account the recent increase in the risk premium required for holding Hungarian assets.

2.    The minutes of this Council meeting will be published at 2 p.m. on 13 October 2006.

MAGYAR NEMZETI BANK

Monetary Council